State of the Industry: A Look into New York City’s Future

May 18, 2015

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One secret to being successful in New York City commercial real estate is having a finger on the pulse of where the market is headed. We gathered four influential leaders to share their perspectives on the state of the industry, including the future of NYC commercial real estate, areas to watch, and their strategies for success. Joining EisnerAmper partner Kenneth Weissenberg for our Real Estate Dealmakers Forum panel were Avison Young principal and Tri-State president Arthur Mirante, J.P. Morgan Asset Management executive director Peter Sibilia, MHP Real Estate Services president and CEO Norman Sturner, and Stonehenge Partners chairman and CEO Ofer Yardeni.

“I can't remember a prior cycle where virtually every one of the commercial neighborhoods in Manhattan is healthy,” Mirante says. Every place that the press has identified as a glut, whether Sixth Avenue or Third Avenue, “is as hot as a pistol now.”

Yardeni says he likes the island of Manhattan in general and hasn’t seen a market like this the past 25 years. But when he looks for value, it’s clearly the Upper East Side, where he’s acquired closed to 1,000 units over the past few years. There, he says, you can still buy multifamily for $600 per square foot, while land is $800 to $900 per square foot, and replacement costs are upwards of $2,000 per square foot. There, you can also pay $50 to $60 per square foot for a one-bedroom unit vs. $90 per square foot in Greenwich Village or Chelsea, where many people just sign a lease and leave at 6:00 a.m., only to return at 11 p.m. and go to sleep.

New York City is a different world now, he says, with different cultures, different generations, and different expectations. He notes that in 2005, he was one of the first buyers on 33rd Street between Eighth and Ninth, “and people thought I was crazy.” The $240 million development investment sold two years ago for $386 million. One reason is, he says, no one expected New York City to become another Silicon Valley with Google, Facebook, Twitter, and other technology companies.

Sibilia says that for office investment, J.P. Morgan is looking at where people are living and moving and trying to get ahead of the trend. His company is investing across all the product types and risk ranges, from core to value-add and opportunistic, and he sees particular demand in non-traditional office locations. Effective rents in Midtown are still trailing peak prices by a sizable margin, so the firm is doing some deals there, and it also likes Downtown, where he expects there’s still a run.

MHP is a particularly big believer in Downtown; its last purchase, four months ago, was 180 Maiden Lane—and the values that are still available Downtown are not found on Park Avenue South, Midtown South, or even The Upper West Side, Sturner says. The company sold its assets Downtown in the late ‘90s, but recently returned after selling 2.2 million square feet of office buildings in Midtown, taking in upwards of $1,100 per square foot. “Maiden Lane was $400 per square foot—that’s a big gap in economics,” he says. Of the building’s 1.2 million square feet, 800,000 of it is vacant, which was another major pull for the company.

Downtown, “there’s les congestion, more space, and more air space than there is in Midtown,” he continues. When you look at buildings going up in Manhattan—such as SL Green’s 1 Vanderbilt and L&L Holding’s 425 Park Avenue and 390 Madison—that’s 2.5 million brand new square feet “that will need $150 per square foot to make a living.” Downtown, that’s only $55 to $65 per square foot, he counters. Between air rights and land costs, it can cost $1,200 per square foot all-in to build a skyscraper, he says, and that means it’s 3.5 years before you even get a check. “Downtown has enormous capability of doing that at half the cost.” However, he concedes that Downtown needs more transportation, like an extension of the Second Avenue Subway from 34th Street to Hanover Square.

Yardeni disagrees. While he has spent a lot of time Downtown and has been fascinated to see the work that has been done, he says it feels like he’s in the middle of a canyon. If he were a betting man and had to invest in either Downtown or at Vanderbilt or Park, he says he would bet on the latter locations rather than the one that is lower priced. “Cheap can be expensive, and expensive can be cheap.... I’d rather pay $200 per square foot to be in Midtown in the best location than $100 square feet and be Downtown.” He notes this is how tenants like hedge funds and law firms think. “I don’t think cost is the biggest factor, but the quality of life.”

Mirante is all about Hudson Yards (although he admits somewhat selfishly, as Avison Young has two big agency assignments there with Extell Development and The Moinian Group). The transformation over the past 24 months has been exciting, and the location is generally perceived to be a “cool” location where the next generation of employees wants to work. Its greatest attribute, he says, is that it was planned as a diverse community. Residential came first and is healthy and thriving, while retail is already in place. Culture is an important element, and now office users are coming. What’s key is that the right zoning and plans were done in advance.

Overall, people want to live, go to school in, and visit Manhattan, Mirante continues, calling it a safe haven that has been attracting unprecedented capital. But we need a continued safe and clean environment, he says—and that goes back to political leadership as being part of our health.

Sturner adds that in 2010, the U.S. Census said that 1 million people would immigrate to greater New York over the next decade, and as of May, we’re now up to 450,000. If we do get to 1 million, that’s 3 million meals a day, 300,000 apartments, and 250,000 jobs, he says. The outer boroughs—like the South Bronx’s 100,000 acres—present an enormous opportunity for residential, but he says we need to get the government involved because it’s the only one who can move this by first looking at infrastructure and then looking at people movers. “We simply haven’t had that administration since Harry Truman.”

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